New York Markets After Hours

Qualcomm chief keeps eye on big picture

Company shows off promising developments, but legal war looming

By

DanGallagher

SAN FRANCISCO (MarketWatch) -- Paul Jacobs is no stranger to litigation, having virtually grown up in company that has spent much of its lifetime slugging it out in court with giants in the wireless communications industry.

Perhaps this is why the 44-year-old chief executive of Qualcomm Inc.
QCOM, -0.95%
seems so sanguine about the company's latest battles -- even as a deadline looms that may cost the company its royalties from Nokia Corp.
NOK, -0.17%
the world's largest maker of wireless handsets.

"We expect to eventually work things out, but right now it's pretty intense," Jacobs said. "I definitely feel that this is a result of the success we've had."

In an interview at the company's enormous exhibit booth at the CTIA Wireless trade show in Orlando, Jacobs took note of the fact that the industry has seen many new competitors emerge in the wireless handset space, which he credits to the company's business model. Besides making chipsets that power wireless phones, Qualcomm also licenses its technology to phone manufacturers who can compete against established players in the market.

Nokia, for its part, believes Qualcomm is trying to create a stranglehold on the wireless market with its broad base of patents covering CDMA, the wireless transmission standard that forms the backbone of many of the next-generation networks being established.

A patent agreement between the two companies expires on April 9. Nokia has previously stated that it will stop paying royalties to Qualcomm after that date until a new deal can be reached.

In an interview with the Wall Street Journal earlier this week, Nokia CFO Rick Simonson said the company expects to pay less to license Qualcomm patents in the future.

To Jacobs, the battle and others currently being waged with Ericsson
ERIC, +0.35%
Texas Instruments
TXN, +0.23%
and Broadcom
BRCM
represent the threat the company has brought to established players in the wireless market.

"When you look at who is suing us, what you see is the number one handset maker, the number one base station maker and the number one chip maker," Jacobs said. "It's basically a few companies who don't like the fact that we've challenged the position they've had."

Jacobs took the reins of Qualcomm two years ago, replacing his father Irwin Jacobs in the CEO slot. The older Jacobs -- who remains as the company's chairman -- founded Qualcomm in 1985 to commercialize a digital wireless technology previously used in military applications for the private market.

That technology, known as CDMA, has been the subject of previous disputes, mostly with European companies such as Nokia and Ericsson who backed a competing standard known as GSM. Though newer versions of CDMA have become the standard for next-generation networks, disputes remain over how much of Qualcomm's patent portfolio covers the latest iterations.

The current lawsuits have become a significant overhang on Qualcomm's stock, which is down about 20% since peaking above the $53 mark in May of last year.

Overall, the stock is up about 17% from its level when the younger Jacobs took the CEO post -- roughly on par with the performance of the S&P 500 over that time.

Still, Wall Street is largely optimistic about the shares. Out of 34 analysts who cover Qualcomm, 27 rate the stock as a buy, according to Thomson Financial. Only one carries a sell rating on the shares.

Some analysts are already starting to back out Nokia's contribution to Qualcomm's expected earnings. Michael Walkley of Piper Jaffray figures the lack of royalties from Nokia could take a nickel out of the company's earnings per share this year.

However, he kept an outperform rating on the stock in a report on Wednesday, calling the shares "a compelling investment" at their current price.

In a presentation to media and analysts at CTIA, Jacobs said little of the legal battles. Rather, he outlined up-coming developments for the company, such as powerful chipsets that can handle 2 billion instructions per second as well as the company's growing MediaFLO unit, which streams TV programs to wireless phones through carriers such as Verizon
VZ, -0.78%
and Cingular from AT&T
T, -1.02%

Lawrence Harris of Oppenheimer believes services like MediaFLO will help create additional demand for Qualcomm's chips, as more consumers seek out devices that can handles tasks such as video streaming.

"As more markets are rolled out and AT&T/Cingular launches service towards year-end, we believe that consumers will be attracted to the service, helping to drive demand for Qualcomm's semiconductors and royalty generation, especially in FY08 and beyond," wrote Harris in a note to clients on Wednesday.

Drawing the most attention at Qualcomm's meeting was a demo of a robot implanted with the company's chipsets. Via remote, a doctor attending the presentation used the robot to examine a patent in a Kansas hospital.

In the next few years, Jacobs sees phone capabilities being embedded in devices such as high-end digital picture and video cameras as well as gaming devices and portable media players.

"You can look at just about any device now and see that it would be better if it were connected to a network," Jacobs said. "If you can go into an existing value chain and find additional revenue and market share, that's a business model that works."

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